Stock Quotes in this Article: BWLD, IRBT, LNET, NFLX, QCOR

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short-squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it’s never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.

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That said, let’s not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It’s important that you don’t go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you’re letting the trend emerge after the market has digested all of the news.

Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move. That’s why it can be worth betting prior to the report – buy only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish.

With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.

Netflix

My first earnings short-squeeze trade idea today is Netflix (NFLX), which is set to release its numbers on Monday after the market close. This company is an Internet subscription service streaming television shows and movies. Wall Street analysts, on average, expect Netflix to report revenue of $868.57 million on a loss of 27 cents per share.

This company has beaten Wall Street estimates for the last four quarters in a row and its coming off a quarter where it beat estimates by 18 cents, reporting a profit of 73 cents per share versus a mean estimate of 55 cents per share. Netflix has registered an average year-over-year revenue growth of 48.2% over the last four quarters. During the fourth quarter of last year, Netflix’s profit dropped 25.2% to $35.2 million, or 63 cents a share, from $47.1 million, or 87 cents a share, the year earlier.

The current short interest as a percentage of the float for Netflix is very high at 17%. That means that out of the 54.09 million shares in the tradable float, 9.2 million are sold short by the bears. This is a very large short interest on a stock with a small tradable float. If Netflix can deliver what the bulls are looking for, then look for a monster short-squeeze post-earnings.

From a technical perspective, NFLX is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last three months, as shares have dropped from $133.43 to its recent low of 98.52 a share. During that downtrend, shares of NFLX have mostly made lower highs and lower lows, which is bearish price action.

If you’re bullish on NFLX, I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $109.71 to $112.46 ( its 50-day) a share with high-volume. Look for volume on that move that registers close to or above its three-month average action of 6.5 million shares. If we get that action, then look for NFLX to make a run at $123 to $126 a share or possibly higher post-earnings.

I would simply avoid NFLX or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support at $100.40 to $98.52 a share with heavy volume. If we get that action, target a drop back towards $90 a share or possibly lower if the bears hammer this stock down post-earnings.

Netflix, one of the Best-Performing S&P 500 Stocks of 2012, shows up on a list of 4 Battleground Stocks Fought Over by the Biggest Investors.

Questcor Pharmaceuticals

An earnings short-squeeze candidate in the biotechnology and drugs complex is Questcor Pharmaceuticals (QCOR), which is set to report results on Tuesday after the market close. This is an equipment rental company. Wall Street analysts, on average, expect Questcor Pharmaceuticals to report revenue of $89.22 million on earnings of 52 cents per share.

If you’re looking for a heavily-shorted stock that’s trading within range of a major breakout post-earnings, then make sure to check out shares of Questcor Pharmaceuticals. Heading into its earnings report this week, shares of Questcor Pharmaceuticals are trading just a few points off its 52-week high of $45.95 a share.

The current short interest as a percentage of the float for Questcor Pharmaceuticals is extremely high at 24.5%. That means that out of the 59.75 million shares in the tradable float, 15.41 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.6%, or by about 513,900 shares. If the bears are caught leaning too hard into this quarter, then a massive short-squeeze could easily develop post-earnings.

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From a technical perspective, QCOR is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past three months, with shares surging from a low of $32.92 to a recent high of $42.44 a share. During that uptrend, shares of QCOR have mostly made higher lows and higher highs, which is bullish technical price action. That move has now pushed QCOR within range of triggering a major breakout trade post-earnings.

If you’re bullish on QCOR, I would wait until after it reports earnings and look for long-biased trades if this stock can manage to break out above $42.44 on high-volume. Look for volume on that move that registers near or well above its three-month average action of 2,050,770 shares. If we get that action, I would then add to any long positions if QCOR can manage to take out its 52-week high of $45.95 with high volume. Target a run towards $50 a share or possibly higher post-earnings if the bulls spark a massive short-squeeze.

I would simply avoid QCOR or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below some near-term support at $39 a share with high-volume. If we get that move, then target a drop below its 50-day moving average of $38.07 a share, and possibly down towards its 200-day moving average of $35.49 a share.

LodgeNet Interactive

A potential earnings short-squeeze trade in the broadcasting and cable TV complex is LodgeNet Interactive (LNET), which is set to release numbers on Tuesday after the market close. This company is the provider of interactive media and connectivity solutions to the hospitality industry in the U.S., Canada and Mexico. There are currently no Wall Street estimates for LodgeNet Interactive.

If you’re looking for a heavily shorted small-cap stock that’s trading within range of a major breakout ahead of its earnings report, then make sure to check out shares of LodgeNet Interactive. This stock has been uptrending strong so far in 2012 with shares up around 60%, and the stock is just 30 cents off its 52-week high of $4.09 a share.

The current short interest as a percentage of the float for LodgeNet Interactive is extremely high at 31.3%. That means that out of the 14.01 million shares in the tradable float, 6.59 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 26.9%, or by about 1.39 million shares. If the bears are caught pressing too strong into this quarter, then this stock could see a short-covering rally of epic proportions.

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From a technical perspective, LNET is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending strong for the last six months, with shares soaring from a low of $1.89 to a recent high of $4.09 a share. That bullish trend higher has now pushed LNET within range of triggering a major breakout trade post-earnings.

If you’re a bull on LNET, I would wait until after its report and look for long-biased trades if this stock can manage to break out above $3.91 to $4.09 a share with high volume. Look for volume on that move that’s near or well above its three-month average action of 149,619 shares. If we get that action, look for LNET to make a run at $5 a share or possibly higher if the bulls gain full control of this stock post-earnings.

I would simply avoid any long-biased trades in LNET post-earnings if the breakout fails to trigger with high-volume.

Buffalo Wild Wings

An earnings short-squeeze candidate in the restaurants complex is Buffalo Wild Wings (BWLD), which is set to release numbers on Tuesday after the market close. This is an owner, operator and franchisor of restaurants featuring a variety of menu items, including its Buffalo, New York-style chicken wings spun in any of its 14 signature sauces or four signature seasonings. Wall Street analysts, on average, expect Buffalo Wild Wings to report revenue of $250.92 million on earnings of 95 cents per share.

This company is aiming to top Wall Street estimates for the third quarter in a row. Last quarter, it beat Wall Street estimates with a profit of 73 cents per share against a mean estimate of 67 cents per share. Buffalo Wild Wings has registered double-digit revenue growth during the past four quarters. The company has averaged year-over-year revenue growth of 27.8% over the last four quarters. The company is looking to extend its trend of income increases for the fourth quarter in a row this earnings period.

The current short interest as a percentage of the float for Buffalo Wild Wings is rather high at 11.4%. That means that out of the 18.15 million shares in the tradable float, 2.07 million are sold short by the bears. This is a low float high short interest situation, so any positive earnings and bullish guidance from BWLD could easily spark a notable short-squeeze post-earnings.

From a technical perspective, BWLD is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock gapped up big back in February from around $70 to over $80 a share on monster volume. Since gapping up big, this stock has trended above the gap and has found buying interest whenever it’s dropped into the low $80s.

If you’re a bull on BWLD, then I would consider long-biased trades after they report if this stock can manage to trigger a near-term breakout above $86.19 to $87.12 (its 50-day) a share with high-volume. Look for volume on a move above those levels that’s near or well above its three-month average action of 710,495 shares. If we get that action, then look for BWLD to make a run at its recent high of $94.81 a share or possibly higher post-earnings.

I would simply avoid BWLD or look for short-biased trades if the stock fails to trigger that breakout, and then drops back below some near-term support at $81.97 a share with heavy volume. If we get that action, then look for BWLD to potentially fill some of that massive gap-up from back in February.

Buffalo Wild Wings shows up on a list of 10 Small-Cap Stocks Poised to Rise, History Shows.

iRobot

My final earnings short-squeeze trade idea today is iRobot (IRBT), which is set to release numbers on Tuesday after the market close. This company engages in designing, developing, and marketing robots for the consumer, government, and industrial markets worldwide. Wall Street analysts, on average, expect iRobot to report revenue of $96.25 million on a loss of 2 cents per share.

If you’re looking for a beaten-down heavily-shorted stock heading into its earnings report, then make sure to check out shares of iRobot. This stock has dropped over 17% so far in 2012, and it’s trending just a few points above its 52-week low of $22.46 a share.

The current short interest as a percentage of the float for iRobot is rather high at 13.6%. That means that out of the 25.77 million shares in the tradable float, 3.37 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 33.1%, or by about 838,000 shares. The bears might be pressing their bets at the worst time, since this stock is so beaten-down that any positive earnings news could spark a big short-squeeze.

From a technical perspective, IRBT is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock gapped down huge back in February from $38.33 to around $25 a share on massive volume. Following that gap down, the stock has been able to find buying interest whenever it’s moved close to $24 a share. The current relative strength (RSI) reading for IRBT is oversold at 35.58. Oversold can always get more oversold, but if IRBT can hold support at $24 then it could spike big post-earnings.

If you’re bullish on IRBT, I would wait until after they report earnings and look for long-biased trades if this stock can hold above its recent low of $24.03 to $22.46 a share. If those levels can hold, I would then look for the stock to break out above some near-term overhead resistance at $25.84 to $25.99 (its 50-day) a share with high-volume. Look for volume on a move above those levels that hits near or well above its three-month average action of 595,298 shares. If we get that action, look for IRBT to make a run at its 200-day moving average of $29.22 a share or possibly higher post-earnings.

I would simply avoid IRBT or look for short-biased trades post-earnings if this stock takes out those previous support levels at $24.03 to $22.46 a share with high volume. If those levels are taken out with volume, then IRBT could easily plunge below $20 a share if the bears whack this stock lower post-earnings.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.